Mutual funds have been launching new fund offers based on very unusual or exotic investment strategies in order to differentiate their equity schemes from those of others. Some of these strategies focus on quality stocks, stocks showing low variance, quant investing, Next Nifty and dividends.
Other exotic strategies include: Avoiding volatility, Betting on ESG, Bharat 22, Betting on MNCs and Equal weightage. Let us look at what comprises these strategies and whether they work for everyone or are better suited to informed investors only.
Strategy: Focus on quality
Stocks are selected based on “quality scores”. Parameters include profitability, leverage and earnings growth variability.
Analysis: Despite quality rally, strategy is lagging
Benchmark: Nifty 200 Quality 30 Index
Strategy: Avoiding volatility
Portfolio of low volatility stocks. Volatility measures used are standard deviation or variance during past year.
Analysis: May underperform once narrow rally is over
Benchmark: NIFTY 100 Low Volatility 30 Index – TRI
Strategy: Low variance
Reduces portfolio volatility by allocating weightage to stocks based on correlation and covariance. Portfolio variance falls when stocks added are less co-related.
Analysis: For those who seek less risky large-cap schemes
Benchmark: Nifty 50 Total Return
Strategy: Betting on ESG
This strategy is for those who want to club investments with social causes. Deals in companies focused on conserving environment, positively impacting communities, ethical business, high governing standards, etc.
Analysis: Globally, ESG funds have underperformed
Benchmark: Nifty 100 ESG Index – TRI
Strategy: Quant investing
Stock selection based on quantitative models and with minimum human biases. Performance of one scheme is not used to invest in another quant fund as the quantitative models are different.
Analysis: Model has beaten even the narrow rally in Nifty
Benchmark: S&P BSE 200 – TRI
Strategy: Equal weightage
Equal weight given to all portfolio stocks at start and brought back to equal weight at time of rebalancing.
Analysis: Will underperform in the short-term
Benchmark: NIFTY 50 Equal Weight Index
Strategy: Next Nifty
While investing in large-cap companies (top 100), this strategy avoids investing in very large-caps (top 50).
Analysis: Top large caps defeat the next large caps
Benchmark: NIFTY NEXT 50 – TRI
Strategy: Bharat 22
In addition to CPSE stocks, also invests in some private sector companies. Not a very clear strategy and chances of losing money are high.
Analysis: Stay away from products designed by sellers
Benchmark: S&P BSE Bharat 22 TRI
Strategy: Focus on dividends
Identifies undervalued stocks on the basis of dividend yields. Predominantly invests in stocks with high dividend yields.
Analysis: This segment is expected to do well
Benchmark: NIFTY Div Opps 50 TRI
Strategy: Betting on MNCs
Invests only in global MNCs. Some also include Indian companies with global operations.
Analysis: Good long term theme, has worked for decades
Benchmark: NIFTY MNC TRI